The controversy around the 5th EU, established with the support of the FATF, is still ongoing in the cryptocurrency market for the second consecutive year. It obliges users of digital currencies to pass an identification procedure. The recent story with WhatsApp has raised another wave of controversy about the protection of personal information that users provide to companies when passing the KYC procedure making Online Exchanges Losing Privacy. This is a mandatory step for cryptocurrency traders. They cannot start working on a cryptocurrency exchange without it.
The Financial Action Task Force on Money Laundering (FATF) claims these measures will help prevent financial crimes and sponsoring terrorism. Yet, by providing information to crypto platforms, the user risks his money. In the case of a data leak or theft, fraudsters will get copies of a passport, a key to a crypto wallet, and much more.
Why do exchanges need KYC procedures?
A few years ago, most cryptocurrency exchanges were completely anonymous. They did not require users to pass the KYC procedure. At the same time, the market suffered money laundering through cryptocurrencies. Besides, a darknet was growing and developing. Thus, it was possible to buy drugs, computer viruses, smuggled jewelry, illegal medicines, and other illegal items with digital coins.
In 2020 about 1 million bitcoins were rotating in the darknet space. 300 thousand BTC of them were stolen from users’ wallets or crypto exchanges, according to Chainalysis research. For comparison, in 2017, this figure was 22% higher. The darknet declined due to the implementation of the KYC procedure. It became an integral part of the 5th EU anti-money-laundering directive (5AMLD). It was adopted on January 10, 2020.
The trading platform possessed the user’s personal data. That is including a copy of a passport and identity documents. So, the regulatory authorities could recognize the criminals and bring them to justice. Thus, scammers faced difficulties withdrawing funds from exchanges or laundering money using cryptocurrency.
The risk for regular users
The process of verifying identity on the exchange usually includes sending personal data. That is name, address, date of birth, photo with a passport, and scanned documents.
- there can be hacking and information leakage on the exchange. Thus, third parties can access your personal data and documents (and then, for example, sell them on the darknet);
- exchanges can transfer your data to government agencies;
- dishonest workers can use information as well;
- it can take a long time to verify your personal information.
Neither the users nor the crypto exchanges welcomed the KYC procedure. They claimed that verification contradicted the essence of the blockchain – anonymity. Constant leaks of customer data stir the pot.
So, in December 2019, the Poloniex exchange announced a large-scale leak of users’ personal information. By the end of 2020, hackers stole more than 1 million email addresses from Ledger.
Is there any way out?
Identity verification is vital for the financial sector. It helps to track money laundering transactions. Still, if for some reason you want to convert cryptocurrencies without providing personal data, decentralized anonymous cryptocurrency exchange is right what you need. Let’s take a closer look at such platforms.
Trading on decentralized cryptocurrency exchanges in early 2020 rose to $372 million. This was an all-time record, according to Dune Analytics research. This firm focuses on Ethereum investigation.
Decentralized cryptocurrency exchanges are widely known for high levels of security. They also allow peer-to-peer cryptocurrency trading without interference or moderation from centralized authorities.
Decentralized crypto exchanges, as a rule, don’t ask for clients’ information. They usually don’t adhere to KYC/AML verifications. Godex.io is one of the most popular sites of this type.
Centralized exchanges are losing their popularity due to over-regulation. Decentralized exchanges are replacing them. With each passing year, the requirements for users on centralized exchanges are becoming stricter. Along with that, the level of security of the exchanges leaves much to be desired.